Ferrexpo Plc (FXPO LN) is due to report its financial results for 1H09 on August 5. We expect weak results due both to a contraction in volumes and a severe drop in iron ore pellet prices. Sales (estimated on DAF/FOB prices) are forecast to decline by 47% year-on-year to US$276m. The company produced 4.17m tonnes of pellets during 1H09, down by 9% year-on-year, but we estimate that the volume of sold pellets was lower, at 4.05m tonnes, despite some de-stocking in 2Q. The average realized pellet sales price tumbled in 1Q09 to reach US$76.7/t DAF/FOB as global demand for iron ore collapsed and the company brought its contract prices in line with spot quotes in a move to retain volumes. We estimate that sales prices continued to trend lower in 2Q to an average of US$60/t FOB/DAF. However, it is important to note that Ferrexpo switched its volumes heavily towards the spot market in 1H09 selling up to 50% of its output in China on a CFR basis (including freight). As a result, actual reported revenues will be higher due to the inclusion of the freight cost in the price but as the distribution costs will also increase by the same amount there will be no effect on the EBITDA line.
The cost of goods sold in 1H09 should decline by 22% year-on-year to US$161m, largely due to a considerable decrease in production costs. We estimate that Ferrexpo reduced its cash production costs to US$33.9/t, down by 17% compared with 1H08 and by 28% compared with 2H08. The cost decrease should be attributed mainly to the substantial depreciation of the Ukrainian currency, which lost 65% of its value against the US dollar in 1H09 year-on-year. With about 70% of Ferrexpo’s costs being incurred in the local currency, this had a profoundly positive impact on its profitability. In addition, falling prices for steel and oil also helped to reduce operating costs.
We forecast Ferrexpo’s 1H09 EBITDA to decline to US$59m, down by 74% year-on-year, with the EBITDA margin plunging to 21% compared with 43% in the same period last year. We further expect EBIT and Net profit to drop to US$37m and US$25m, down by 82% and 84% year-on-year, respectively, bringing the net margin down to only 9% in 1H09 compared with 30% in the same period of last year. We also note that while the finance expense may be lower than expected due to a decrease in the LIBOR rates during 1H, there might be some exceptional items that may distort the bottom line.
Although no earnings consensus estimates for Ferrexpo's 1H09 are available, we believe most analysts expect the results to be weak. Therefore, changes to the full year consensus should occur in 2H09, when Ferrexpo's performance is likely to improve as demand for iron ore is growing and spot prices are rising. Since we published our initiation report, the full 2009 earnings consensus has decreased. We are currently in line with consensus on 2009E revenue (US$623m) and net profit (US$85m) and are 8% below on EBITDA (US$162m).